Climate Diplomacy, Climate Finance, and Investment in Small Island Developing States

Small Island Developing States (SIDS) have been seeking to safeguard their interests on the international level, given their disproportionate vulnerability to climate change. This report aims to analyse how SIDS have been attempting to harness climate diplomacy and reshape climate finance, before outlining the significance of these developments for private sector actors exploring investment opportunities in SIDS.

SIDS—individually and through coalitions—have been strategically employing a combination of moral diplomacy, geopolitical leverage, and cross-state cooperation to shape international negotiations in their favour and develop innovative solutions to climate-related challenges. One such innovation is the Bridgetown Agenda. Proposed by Barbados and supported by several wealthy stakeholders, it ambitiously stands to tackle extant issues faced by SIDS within the international financial system, although it risks failing to achieve adequate private sector funding and public sector support. With SIDS increasingly mobilising around climate policies, a range of investment opportunities has emerged for private sector actors. The backdrop of collective negotiations, resource sharing, and regional cooperation generates further opportunities in the tourism, renewable energy, and climate-resilient infrastructure and technologies sectors, as well as the areas of climate adaptation and resilience and sustainable development.

Despite these opportunities, the political landscape in SIDS can present significant challenges that impact both short-term operations and long-term profitability. Key political risks include weak and/or uncertain regulatory environments, engagement in great power competition, governance and corruption challenges, domestic political instability, and climate vulnerability. Nevertheless, political risks inherent in SIDS can be mitigated through private sector actors actively engaging in climate diplomacy and leveraging climate finance frameworks such as the Bridgetown Agenda.